ECONOMICS 1101 - MICROECONOMICS 1
Semester 1, 2008
Tutorial 8, Week 9
John Jones owns and manages a café with annual revenue of $50 000 and annual
expenses are as follows:
Food and drink
Interest on loan for equipment
Calculate John’s annual accounting profit.
John could earn $10,000 per year as a recycler of aluminium cans.
prefers to run the café.
In fact, he would be willing to pay up to $2,750 per year
to run the café rather than to recycle.
Is the café making an economic profit?
Should John stay in the café business?
Suppose the café’s revenues and expenses remain the same, but recyclers’
earnings rise to $11,000 per year.
Is the café still making an economic profit?
Suppose John had not had to get a $100,000 loan at an annual interest rate of 10
per cent to buy equipment, but instead had invested $100,000 of his own money
How would your answer to parts (a) and (b) change?
If John earns $10,000 a year as a recycler, and he likes recycling just as well as
running the café, how much additional revenue would the café have to collect
each year to earn a normal profit?
Assume that the Australian wheat industry is a perfectly competitive industry in
which all farms have upward sloping marginal cost curves and U-shaped average cost curves.
Illustrate the initial (and long-run) equilibrium for the wheat industry and for an
individual wheat farmer, showing the market price (P), market quantity (Q) and
individual farm quantity (q).
Explain clearly how each farm determines its level
of output, and why each farm earns zero profits, relating your answer to the
assumptions of perfect competition.
Suppose that a decrease in the demand for bread causes a fall in the demand for
Use the diagram to show what happens in the short-run to the wheat
market and to each existing farm. Will the new long-run equilibrium price be
above, below or equal to the short-run equilibrium price?
Now (instead of b.) assume that a severe drought increases costs for all farms.
particular, assume that the marginal cost and average cost curves both increase
such that the long-run equilibrium output for each firm is unchanged.
this and the corresponding upward shift of the supply curve.
Identify the new
price on the industry diagram and use this to explain why farmers will reduce
their wheat output in the short run. Also explain why each farmer will be making
a loss in the short run. Illustrate those losses on the individual farmer’s diagram.